Obama to recast agenda to focus on jobs, deficit

President Obama walks on the West Wing Colonnade towards the Oval Office, January 27, 2010.

WASHINGTON (Reuters) - President Barack Obama will recast his agenda in a high-stakes address to the American people on Wednesday, focusing on jobs and deficits as he seeks to weather his worst political storm since taking office.

Obama's annual State of the Union speech to Congress at 9 p.m. ET follows the loss by his Democratic party of a pivotal Senate seat, imperiling legislative priorities like healthcare reform and financial regulation.

The speech will include a call by the president to repeal the policy of "Don't Ask, Don't Tell" that prevents openly gay people from serving in the military, a U.S. official said.

Amid pomp and ceremony, Obama will try to convince his prime-time television audience that he understands their economic pain as he proposes a new job-creation push, curbs on Wall Street and tax credits to middle-class families.

The speech will reflect a starkly different political reality for Obama, who took office a year ago promising wholesale change in Washington but must now salvage a congressional agenda left in tatters by a Republican election victory in Massachusetts.

Obama will aim to tap into public discontent, stemming mainly from the still-struggling economy and a painfully high 10 percent unemployment rate, while buying time for his administration to regroup.

Offering help to businesses, Obama will call for an extension of a tax break that allows them to write off investments in equipment more quickly. It will be worth $38 billion over 2010-2011, an administration official said.

Obama must outline how efforts to overhaul the healthcare system can proceed. Reform faces possible failure now that Democrats no longer hold a "supermajority" of 60 Senate votes to overcome Republican procedural hurdles.

After setting the healthcare revamp as his top legislative objective, Obama has sent mixed signals about whether he intends to try to rescue the sweeping bill or settle for a scaled-back version.

DEFLECTING CRITICISM

Another priority, imposing caps on carbon emissions to fight climate change, is expected to be pushed aside for now, though Obama will still discuss it in his speech.

With congressional elections coming in November when many of his Democratic allies fear losing their seats, Obama will highlight economic improvements and try to deflect criticism that the healthcare push shifted his focus.

The economy was shedding hundreds of thousands of jobs each month when Obama took office but it has begun to slowly grow again, though unemployment remains stubbornly high.

Countering Republican efforts to paint him as a big spender, Obama is expected to propose a three-year freeze on some domestic spending programs.

The proposal received a lukewarm reception by House of Representatives Speaker Nancy Pelosi, raising questions about whether the Democratic-led U.S. Congress would pass it.

Pelosi told the Politico newspaper the spending freeze should be across-the-board and not exempt defense expenditure.

Obama will also call for the creation of a bipartisan panel to recommend how to rein in the deficit, which soared to $1.4 trillion in the 2009 fiscal year.

In a preview of the opposition's response, Senate Republican leader Mitch McConnell urged Obama to "put aside the big-government, big-spending agenda of the past year, move to the center, and embrace the sensible, step-by-step approach to our problems that Americans are asking for."

The deficit is forecast at $1.35 trillion in 2010, near its highest levels as a percentage of gross domestic product since World War Two, according to the Congressional Budget Office.

White House aides have played down the idea of "rebooting" the Obama presidency. But experts said he needs to correct his course to help his party avoid crushing losses in the congressional elections.

After his speech, Obama will take his retooled message on the road. His first stop will be Tampa, Florida on Thursday, where he will announce $8 billion in awards for high-speed rail projects, a plan which a White House official said would create or save tens of thousands of jobs.

(Additional reporting by Matt Spetalnick, Ross Colvin, Steve Holland, editing by Alan Elsner and Chris Wilson)